Big Data, Cloud Computing Spur Software Innovation

When this year's widespread technology sell-off dragged shares of Splunk down more than 61% between February and August, Thomas Vandeventer was buying.

The managing director of the Tocqueville Opportunity Fund picked up shares of the data analytics software company at 85 and 77 in March, and at 50 per share in July and September.

Splunk (SPLK) turned and rose 77% from an August low through November, validating Vandeventer's against-the-grain strategy.

Several other database software developers also staged healthy recoveries. ServiceNow (NOW) on Friday traded 55% above its low from early May. Tableau Software (DATA) has climbed 69% since May.

"There wasn't anything unique to Splunk's sell-off that wasn't happening with other companies in the space," Vandeventer told IBD. "Sometimes I use the expression, 'When all of the bath water is being thrown out, you want to try to find the baby' and Splunk was a case of that; it was just inordinate selling."

1.Business

Database software makers generally provide companies with more innovative ways to manage electronic data. The group received an added boost this past week from industry heavyweight Oracle (ORCL), which surged 10% Thursday after reporting its fiscal second-quarter results after Wednesday's close.

The company reported earnings and revenue growth for the quarter narrowly above consensus projections. But revenue from its cloud-based business — which offers software online, rather than through installation on corporate networks — rose 45% for the quarter, to $516 million. That is still a fraction of Oracle's $9.6 billion take for Q2, but showed gathering momentum.

Smaller niche players like Splunk are also gaining momentum. Its machine-to-machine data analytics software helps companies detect bottlenecks in their data networks and software applications. Customers also use the software to locate network security breaches.

Its year-over-year quarterly revenue slowed slightly, to 48% in Q3. But EPS surged 100%, and analysts are projecting EPS of 11 cents for its 2016 fiscal year, up 175% from the 4 cents expected this year.

Splunk is among a number of companies cashing in on growing demand for managing growing amounts of electronic data, says Daniel Ives, an analyst for FBR Capital Markets & Co.

"They created a new category around Big Data, and now the benefits of all of that R&D, sales and marketing have started to pay off in a big way as sales have ramped and expenses have come down," he told IBD.

Managing data is the common denominator for database software makers, but the industry's interactions are diverse.

Oracle runs into rivals such as Open Text (OTEX), IBM (IBM), SAP (SAP) and others in selling other products, including middleware for building software applications and data analytics.

Tableau Software has become the leading provider of data analytics software that helps companies better analyze sales and other data in easy-to-read charts. Rivals run the gamut: Oracle, SAP, Qlik Technologies (QLIK) and MicroStrategy (MSTR).

2.Market

By 2018, global database software revenue will top $50.7 billion, up 68.3% from last year, says Gartner, a research firm. Worldwide sales of business analytics software will reach $59.2 billion, up 56.8% from 2013, says market tracker IDC. Contrast that with estimates for global IT spending, which is expected to grow by only 2.1% this year to $3.7 trillion vs. 2013, says Gartner.

Companies need database and analytics software for both current and future needs, says Terilyn Palanca, an analyst for Gartner. "A lot of this is being driven by the buildup for analytics, Big Data as well as ongoing additional buildout for operational systems," she said.

Splunk, which is somewhat unique in the space, is getting in on the ground floor of what appears to be an emerging market.

By 2018, machine-to-machine devices will account for 35% of all global Internet network connected devices vs. 18.6% last year, according to a recent report by Cisco Systems (CSCO).

3. Climate

Tableau is working on an offshore expansion to better compete with offshore-savvy rivals, including Qlik.

The work already appears to be paying off, with its Q3 offshore revenue larger than the company's total international revenue in 2012, says Mark Murphy, an analyst for J.P. Morgan in a Dec. 2 report.

"These early dividends are very encouraging and speak to the demand for Tableau's products globally," he wrote.

On Dec. 12, Hortonworks (HDP) went public, becoming the first publicly traded company to offer open-source Hadoop software to tackle the database software market.

Another new issue, New Relic (NEWR), launched an IPO the same day. It makes analytics software for monitoring and trouble-shooting applications. Investors jumped on both in spite of no profits. Hortonworks' stock climbed nearly 65% to 26.38 a share on its first day of trading, while New Relic finished the day up 48% at 33.99.

Acquisitions also are common.

Open Text said on Dec. 5 that it plans to acquire Actuate, a maker of business intelligence and analytics software, for $330 million. On Dec. 2 Progress Software (PRGS) acquired Telerik, an application development company, for $262.5 million.

In the last few years Oracle has also acquired several cloud-based tech companies, including Taleo, Responsys, Micros Systems and TOA Technologies. But with cloud revenues still only a small percentage of its overall revenue, Oracle needs to step up its acquisition strategy, analyst Ives says.

"Oracle is going to have to be much more aggressive on M&A or successful in that ramp to the cloud," he said. "Otherwise there could be some tough days ahead."

4.Technology

Oracle's biggest challenge is transitional.

The company is waiting for wider customer adoption of its 12c data base software released last year, while its hardware systems business continues to struggle.

Oracle is also making a tough conversion from collecting large payments for licenses to its database and other software products to the cloud, where customers pay a monthly subscription fee.

Realizing revenue over several months instead of all at once skews quarterly growth rates for a few years, says Carl Olofson, an analyst for market tracker IDC.

"There is going be a period of time where your revenue is going to be a little depressed because of the change, but the benefit to a company like Oracle is that it becomes a continuing revenue stream," he told IBD.

Tableau and Splunk are also offering cloud versions of their respective software services.

5.Outlook

Database software and data analytics software companies are clearly cashing in on customer demand for new, better and more innovative ways to manage data coming from a growing number of wide number of sources ranging from mobile devices to smart cars.

 Upside: Lack of competition is one plus for Splunk, says J.P. Morgan analyst Murphy in a Dec. 2 report.

"Most of Splunk's competitors are small, private point-product companies that are seeking key areas for differentiation, but are not necessarily a platform like Splunk," he wrote.

Tableau has been moving from midmarket companies to Fortune 500 firms. It also has soundly beaten analyst revenue estimates in its last five consecutive quarters.

"They are another company that has created another category in Big Data and the growth speaks for itself," Ives says.

And Oracle, even though it is struggling with its move to the cloud, might be built for long-term, Murphy says.

"Despite Oracle experiencing slower long-term growth in many of its products, we expect a relatively resilient earnings stream because of its high margins (and) large installed base of customers," he wrote.

Like Tableau, Splunk will have to continue to pour dollars into sales and marketing to keep bigger potential rivals at bay, Ives says.

"You have a lot of the big guys at Oracle, EMC (EMC) and Hewlett-Packard (HPQ) going after (Splunk's) market, so you have to continue to innovate to be the main player," he said.

Companies such as Oracle might have to wait longer than expected for large companies to transition to the cloud, IDC's Olofson says.

"The larger enterprises have big investments in (existing) data centers, and in some cases its equipment hasn't aged out yet and you can't really justify retiring a system before the equipment has aged out because that's like throwing money away," he said.

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